ICAI~ key clarifications on Grants

CA

Ind AS Technical Facilitation Group' (ITFG) of Ind AS Implementation Group recently issued its Bulletin 17 and, amongst other changes, provided clarifications on certain key aspects of government grant accounting under Ind AS 20Accounting for Government Grants and Disclosure

of Government Assistance. One of the issues dealt with is the transitional accounting of one of the recent amendments to Ind AS 20.

In this article, we take a close look at the clarifications related to government grant accounting and discuss the practical implications.

Transitional provisions of the amendments to Ind AS 20

Ind AS 20 was recently amended in certain respects and consequential amendments were made to certain other Ind ASs vide notification dated 20th September, 2018 issued by the Ministry of Corporate Affairs (MCA). One of the amendments made to Ind AS 20 has the effect of allowing an entity to initially recognise a government grant in the form of a non-monetary asset either at a at fair value or at a nominal amount. As per the pre-amended (or original) Ind AS 20, such a grant was necessarily required to be initially recognised at fair value.

The amendments made by the notification apply for the annual periods beginning on or after April 1, 2018. The issue dealt with the ITFG was that of the government grant in the form of land that an entity had received free of cost subject to compliance with specified terms and conditions. Under previous GAAP, under AS 12, Accounting for Government Grants, the land was recorded at a nominal value of Re.1.

The issue was raised in two scenarios:

1.		The entity is a first time adopter of Ind AS in financial year 2018-19
2.		The entity is not a first time adopter of Ind AS in financial year 2018-19, i.e. it has already adopted Ind AS in the past

Scenario 1: The entity is a first time adopter of Ind AS in financial year 2018-19

Ind AS 101 provides the transition guidance for a first time adopter of Ind AS. Ind AS 101 requires a first time adopter to use the same accounting policies in its opening Ind AS balance sheet and throughout all periods presented in its first Ind AS financial statements. Those accounting policies shall comply with each Ind AS effective at the end of its first Ind AS reporting period, with certain exceptions.

Accordingly, a first time adopter is required to apply the amended Ind AS 20 for all periods presented in its financial statements for 2018-19, including in preparing its opening Ind AS balance sheet as at April 1, 2017..

The general requirement in Ind AS 101 is that accounting policies followed in the opening Ind AS balance sheet and in reporting other periods included in first Ind AS financial statements should comply with all Ind ASs that are effective at the end of the first Ind AS reporting period. Those accounting policies are applied on a retrospective basis However, as a departure from this general requirement, Ind AS 101 provides certain mandatory exceptions and voluntary exemptions from retrospective application of some aspects/requirements of other Ind ASs. Ind AS 101 does not contain any mandatory exceptions or voluntary exemptions from retrospective application of Ind AS 20. Consequently, a first time adopter is required to apply the requirements of Ind AS 20, retrospectively at the date of transition to Ind ASs (and consequently in subsequent accounting periods).

It is to be noted that under the amended Ind AS 20, an entity has a choice of recognising the grant and the asset (i.e., land in the given case), initially either at fair value or at a nominal amount.

Scenario 2: The entity is not a first time adopter of Ind AS in financial year 2018-19, i.e. it has already adopted Ind AS in the past

If financial year 2018-19 is the second (or third) Ind AS reporting period of the entity, Ind AS 101 does not apply in preparing the financial statements for the financial year 2018-19.

The amended Ind AS 20 does not contain any specific transitional provisions. The requirements relating to changes in accounting policies are primarily contained in Ind AS 8, Accounting Policies, Changes in Accounting Estimates and Errors. Accordingly, the entity has to apply the change retrospectively, if it is permitted by Ind AS 8, and decides to voluntarily change its accounting policy (from fair value to nominal amount).

Amended Ind AS 20 provides an entity a choice between recognising the grant and the asset initially either at fair value or at a nominal amount. Thus, an entity is not required to change the accounting policy relating to the grant as applied by it in preparing its financial statements for the previous financial year. The issue then is whether an entity can change its accounting policy voluntarily.

A change in accounting policy other than a change required by an Ind AS can be made by an entity only it is permitted to do so under Ind AS 20 i.e. a voluntary change in an accounting policy can be made only if the change "results in the financial statements providing reliable and more relevant information about the effects of transactions, other events or conditions on the entity's financial position, financial performance or cash flows." Thus, Ind AS 8 lays down two requirements that must be complied with in order to make a voluntary change in an accounting policy. First, the information resulting from application of the changed (i.e., the new) accounting policy must be reliable. Second, the changed accounting policy must result in "more relevant" information being presented in the financial statements.

The ITFG states that whether a changed accounting policy results in reliable and more relevant financial information is a matter of assessment in the particular facts and circumstances of each case. In order to ensure that such an assessment is made judiciously (such that a voluntary change in an accounting policy does not effectively become a matter of free choice). Ind AS 20 paragraph 29 requires an entity making a voluntary change in an accounting policy to disclose, inter alia, "the reasons why applying the new accounting policy provides reliable and more relevant information". In accordance with the above, a voluntary change in accounting policy by an entity can be made only if the change results in the financial statements providing reliable and more relevant information about the effects of transactions, other events or conditions on its financial position, financial performance or cash flows.

Import/export duty/tax exemptions and duties upon fulfillment of certain conditions by SEZ/STP unit

An entity, a registered SEZ/STP unit, receives benefits in the form of exemption from payment of taxes and duties on import/export of goods upon fulfilment of certain conditions under a scheme of Government of India. Whether the benefit being received by MNC Ltd. is a government grant or a government assistance other than government grant under Ind AS 20? If it is a government grant, whether it is a grant related to asset or grant related to income and how is the same to be accounted for?

The ITFG states that the benefit of exemption from payment of taxes and duties levied by the government is a government grant and should be accounted for as per the provisions of Ind AS 20.

The classification of the grant as related to an asset or to income will require exercise of judgement and careful examination of the facts, objective and conditions attached to the scheme. The purpose of the grant and the costs for which the grant is intended to compensate would also be required to be ascertained carefully.